Fundamentals

Gold Suffers its Worst Tumble since January as Demand for Safety Clearly Favors the Dollar

North American Commodity Update

Commodities – Energy

Oil Slowly Recover from its Sharpest Plunge in Seven Months

Crude Oil (WTI) -  $75.72  //  -$2.24 //  -2.87%

The US-based NYMEX exchanged was closed Thursday for the Thanksgiving holiday, preventing the world’s most heavily traded crude futures contract from responding to the global shockwave that was sparked by a potential sovereign ‘credit event’ that threatened the stability that has established itself this year. On Friday’s open, the market immediately went to work adjusting the active oil contract to reflect its fair value; and by the early European session, prices were as far down as 7.1 percent (the biggest drop since April 20th) from Wednesday’s close. This reaction is to be expected not only because of the irregular liquidity conditions and the volatility it generates; but also because of this commodity’s association to risk appetite. Through the most of this year, a demand to diversify funds into those assets that would produce a higher yield or merely showed a potential for capital appreciation found crude a receptive investment. However, confidence in crude had already begun to wane prior to this shock; so the response from price would find even more leverage. Heading into the US session, we see oil starting to recover its footing and trade back within the range developed over the past month. The commodity will likely see its correlation to the US dollar tighten over the next few active trading days as the weight of risk trends takes time to wear off.

Looking ahead to next week, the market will also turn its attention back onto supply-and-demand fundamentals. This past week, the Department of Energy’s inventory numbers set crude stores at a four-week high and 7.8 percent above the five-year average. Distillates are a staggering 26 percent above their own mean. On the other side of such abnormally high levels of supply; demand remains reserved by a slow recovery in business and consumer spending. This is an imbalance that will not be easily remedied by a single storm or a few producers that reduce output. A meaningful shift in the fundamental profile for value will have to come through a clear and steady revival in those areas of growth are responsible for consumption, a world-wide reduction on output or a combination of both. Considering the dependency that many producers place upon this natural resource though, demand is the only realistic equalizer.

Commodities – Metals

Gold Suffers its Worst Tumble since January as Demand for Safety Clearly Favors the Dollar

Spot Gold  -  $1,176.30 //  -$12.08  // -1.02%

Gold has been weighed as a safe haven and the precious metal was found wanting. One of the commodity’s primary roles in the financial markets is a harbor for capital. However, the speculative interest that has built up over the past three to six months has clearly altered the perception of stability and value behind the metal. After Dubai’s request for a delay on its debt repayments sent waves of credit crisis panic throughout the market, investment capital was quickly transferred to those corners of the market where the development of another Lehman Brothers-level catastrophe wouldn’t wipe out a majority of the floating wealth in the market. Already pushing record highs and doing so with high levels of volatility, gold wouldn’t represent a realistic haven. What’s more, considering the commodity is denominated in dollars, the bearish response would garner even greater amplitude as traders sought the safety of the world’s most liquid currency and the Treasuries that back it. This volatile day has already started to level out; but the dramatic correction today will nonetheless leave a stain that will act as a warning to just how quickly this popular asset can correct under unfavorable conditions.

Spot Silver  -  $18.33  //  -$0.34  //  -1.79%

Intraday, spot silver was suffering from its sharpest decline since August 17th. Down 5.2 percent at one point, the commodity was threatening to revive direction (with an unfavorable bearing) that has been absent for the past eight active trading sessions. However, the late-session reversal is bringing the market back into alignment and could allow the metal a fresh start on Monday. Considering volume on the active futures contract is at its lowest level in over a month (the lingering effects of the US Thanksgiving holiday), we have yet to see how the broader market will respond to the threat of another financial crisis when liquidity is topped off.

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Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com